REPORT TO THE NATIONS 2018 GLOBAL STUDY ON OCCUPATIONAL FRAUD AND ABUSE

Transcription

1 REPORT TO THE NATIONS 2018 GLOBAL STUDY ON OCCUPATIONAL FRAUD AND ABUSE AS I A- PACI F I C E DI T I O N

2 CONTENTS Introduction 3 How Occupational Fraud Is Committed 4 Detection 6 Victim Organizations 8 Profile of a Fraud Perpetrator 14 Case Results 16 Methodology 18 About the ACFE 20 2 Contents Report to the Nations: Asia-Pacific Edition

3 INTRODUCTION In April 2018, the ACFE released the 2018 Report to the Nations, which provided a global analysis of the costs and effects of occupational fraud (i.e., fraud committed against the organization by its own officers, directors, or employees). The 2018 Report to the Nations, which was based on 2,690 cases of occupational fraud reported from 125 countries, highlighted the tremendous impact occupational fraud has on organizations throughout the world. With this report, we now focus more closely on how occupational fraud impacts organizations in the Asia-Pacific region. This study is based on the 220 cases of occupational fraud from Asia-Pacific countries that were reported in our 2017 Global Fraud Survey. Collectively, these cases, which accounted for 11% of all cases in our global study, caused a median loss of USD 236,000 and lasted a median 18 months before they were detected. Figure 1 shows the countries where these frauds occurred. This report contains information on fraud losses in the Asia-Pacific cases we analyzed 1, along with the methods of fraud committed, the ways in which the frauds were detected, the characteristics of the victim organizations and their anti-fraud controls, the characteristics of the fraud perpetrators, and the results of the cases after the frauds had been discovered. 2 We hope this report will be of value to our readers in the Asia-Pacific region, helping them tailor fraud prevention, detection, and investigation strategies to the specific fraud risks faced by their clients and employers. 1 Readers should note that all losses in this report are presented in U.S. dollars (USD), which is how respondents reported this information in our 2017 Global Fraud Survey. 2 For a glossary of terms used in this report, please see pg. 78 of the 2018 Report to the Nations. FIG. 1 Cases by country in the Asia-Pacific region Country Number of cases Australia 38 Cambodia 2 China 49 East Timor 1 Hong Kong 10 Indonesia 29 Japan 4 Macau 1 Malaysia 14 Myanmar (Burma) 1 New Zealand 8 Papua New Guinea 1 Philippines 25 Singapore 17 South Korea 6 Taiwan 6 Thailand 3 Vietnam 5 Total cases: 220 MEDIAN LOSS: usd 236, CASES 11% OF ALL CASES Median duration of a fraud scheme 18 MONTHS Introduction Report to the Nations: Asia-Pacific Edition 3

4 HOW OCCUPATIONAL FRAUD IS COMMITTED FIG. 2 How is occupational fraud committed in the Asia-Pacific region? 80% As part of our ongoing research, we examine the methods by which occupational fraudsters perpetrate their schemes. Our results have consistently shown that occupational fraud cases can be broken down into three broad categories. The most common of these is asset misappropriation; 80% of cases in the Asia-Pacific region involved the misappropriation of assets from the victim organization. These cases also are the least costly, causing a median loss of USD 180,000. On the other end of the spectrum in both frequency and median loss is financial statement fraud. This category accounted for 13% of cases in the region and had a median loss of USD 700,000. Corruption schemes fell in the middle in both respects, occurring in 51% of cases and causing a median loss of USD 500,000. Both the frequency and median loss of corruption in the Asia-Pacific region were notably higher than was found in our global data, which highlights the particularly high risk corruption presents in this region. PERCENT OF CASES 51% Asset misappropriation Corruption 13% Financial statement fraud $180,000 MEDIAN LOSS $500,000 4 How Occupational Fraud Is Committed Report to the Nations: Asia-Pacific Edition $700,000

5 Because asset misappropriations account for such a large percentage of occupational fraud cases, we further divided that category into sub-schemes based on the specific mechanism used to misappropriate assets. Figure 3 shows the breakdown of the cases in the Asia-Pacific region among the nine sub-categories of asset misappropriation, along with corruption and financial statement schemes for comparison purposes. Corruption schemes were more than twice as common as any other scheme type, followed by the misappropriation of noncash assets, which occurred in one-quarter of the cases reported to us from the region. FIG. 3 What are the most common occupational fraud schemes in the Asia-Pacific region? Corruption Noncash Expense reimbursements Billing Financial statement fraud Cash on hand Check and payment tampering Cash larceny Skimming Payroll Register disbursements 51% 25% 17% 14% 13% 13% 8% 8% 7% 4% 3% How Occupational Fraud Is Committed Report to the Nations: Asia-Pacific Edition 5

6 DETECTION We asked respondents to provide information about how frauds were initially detected. The importance of tips as a fraud detection method is clear; Figure 4 shows that more cases were discovered this way in the Asia-Pacific region than the next six detection methods combined. Our data also shows that organizations can increase the amount of cases detected by tips by implementing hotlines 52% of cases were detected by tip when a hotline was in place, compared to 40% in organizations without one. FIG. 4 How is occupational fraud initially detected in the Asia-Pacific region? Tip Internal audit Management review External audit Other By accident Document examination Account reconciliation Surveillance/monitoring Notification by law enforcement IT controls Confession 47% 16% 10% 8% 4% 4% 3% 3% 2% 1% 1% <1% 6 Detection Report to the Nations: Asia-Pacific Edition

7 HOTLINES AND REPORTING MECHANISMS Respondents provided information about hotlines and reporting mechanisms that can help us understand who is reporting fraud, how they are doing so, and how effective such mechanisms are in the Asia-Pacific region. Fraud losses were 57% SMALLER at organizations with hotlines than those without 74 % of victim organizations had hotlines $171,000 $400,000 Organizations without hotlines were more than TWICE AS LIKELY to detect fraud by accident or by external audit Tips are by far the most common initial detection method 54% of tips are from EMPLOYEES employees provide over half of tips. About 1/3 come from outside parties. 17% of tips are ANONYMOUS Telephone and hotlines are most popular, but whistleblowers use various reporting mechanisms Telephone hotline Mailed letter/form 37% 37% 35% Other Web-based/ online form Fax 16% 8% 4% NOT ALL TIPS COME THROUGH HOTLINES When a reporting mechanism is not used, whistleblowers are most likely to report to: DIRECT SUPERVISOR 28% EXECUTIVE 21% COWORKER 13% BOARD OR AUDIT COMMITTEE 13% FRAUD INVESTIGATION TEAM 11% Detection Report to the Nations: Asia-Pacific Edition 7

8 VICTIM ORGANIZATIONS To gain a better understanding of the victim organizations in our study, we asked respondents to provide information about the victims type, size, and industry. Participants also described the types of controls that were in place to prevent and detect fraud at the time the schemes occurred. Type of Organization As shown in Figure 5, more than 75% of the frauds in the Asia-Pacific region occurred at for-profit organizations, with 39% of the victim organizations being private companies and 38% being public companies. The private companies in our study suffered the greatest median loss, at USD 310,000. Government organizations were the victims in only 17% of frauds and had a median loss of USD 193,000. FIG. 5 What types of organizations are victimized by occupational fraud in the Asia-Pacific region? 39% 38% PERCENT OF CASES 17% 4% 3% Private company Public company Government Not-for-profit* Other* MEDIAN LOSS $200,000 $193,000 $310,000 *Median loss calculation omitted for categories with fewer than ten cases. 8 Victim Organizations Report to the Nations: Asia-Pacific Edition

9 Size of Organization Figure 6 shows the frequency and median loss of fraud schemes in the Asia-Pacific region based on the size of the victim organization. Interestingly, the smallest organizations (those with fewer than 100 employees) and the largest (those with more than 10,000 employees) had equally large median losses. It is important to note that small organizations are likely to be more significantly impacted by losses of this size than their larger counterparts. FIG. 6 How does an organization s size relate to its occupational fraud risk in the Asia-Pacific region? 32% 29% PERCENT OF CASES 21% 19% <100 employees employees 1,000 9,999 employees 10,000+ employees $100,000 MEDIAN LOSS $200,000 $400,000 $400,000 Victim Organizations Report to the Nations: Asia-Pacific Edition 9

10 Industry of Organization Figure 7 illustrates the breakdown of the cases reported to us based on the industry of the victim organization. The greatest number of cases in the Asia-Pacific region occurred in the manufacturing, banking and financial services, and government and public administration sectors. Readers should note that this data most likely represents industries that tend to employ the greatest number of CFEs, rather than the industries that are most susceptible to fraud. FIG. 7 What industries were victimized by occupational fraud in the Asia-Pacific region? Manufacturing Banking and financial services Government and public administration Health care Education Energy Technology Insurance Construction Other Transportation and warehousing Food service and hospitality Mining Retail Agriculture, forestry, fishing, and hunting Arts, entertainment, and recreation Services (other) Religious, charitable, or social services Real estate Wholesale trade Services (professional) Utilities Communications and publishing Telecommunications 17% (38 cases) 11% (25 cases) 10% (21 cases) 5% (12 cases) 5% (12 cases) 5% (12 cases) 5% (11 cases) 5% (10 cases) 4% (9 cases) 4% (8 cases) 4% (8 cases) 4% (8 cases) 4% (8 cases) 3% (7 cases) 3% (6 cases) 2% (5 cases) 2% (4 cases) 1% (3 cases) 1% (3 cases) 1% (3 cases) 1% (2 cases) 1% (2 cases) 1% (2 cases) <1% (1 case) 10 Victim Organizations Report to the Nations: Asia-Pacific Edition

11 R+95 R+95 To help organizations in the Asia-Pacific region benchmark their fraud risk and loss amounts, Figure 8 provides the median loss caused by the reported frauds in all industries for which we received ten or more cases. FIG. 8 How does occupational fraud affect organizations in different industries in the Asia-Pacific region? % 25 7% 21 7% 12 Cases Cases Cases Cases 7% MANUFACTURING BANKING AND GOVERNMENT AND PUBLIC HEALTH CARE FINANCIAL SERVICES ADMINISTRATION Median Loss: $500, R R R 5+ Median Loss: $310,000 Median Loss: $129,000 Median Loss: $100, R R R 5+ EDUCATION Median Loss: $236, % 12 7% 7% % Cases ENERGY Cases Median Loss: $286,000 Cases TECHNOLOGY Median Loss: $85,000 INSURANCE Cases Median Loss: $105,000 Victim Organizations Report to the Nations: Asia-Pacific Edition 11

12 Anti-Fraud Controls in the Asia-Pacific Region Internal controls play an important part in protecting organizations against fraud. As part of our research, we examined which anti-fraud controls the victim organizations in the Asia-Pacific region had in place at the time the fraud occurred, as well as what internal control weaknesses primarily contributed to the fraud. FIG. 9 What anti-fraud controls are the most common in the Asia-Pacific region? Control Percent of cases External audit of financial statements 93% Code of conduct 87% Internal audit department 80% Management certification of financial statements 79% Hotline 74% External audit of internal controls over financial reporting 73% Management review 71% Independent audit committee 69% Anti-fraud policy 60% Fraud training for employees 59% Fraud training for managers/executives 57% Employee support programs 49% Dedicated fraud department, function, or team 42% Formal fraud risk assessments 37% Surprise audits 34% Proactive data monitoring/analysis 32% Job rotation/mandatory vacation 16% Rewards for whistleblowers 11% We compared the median loss and median duration of fraud at victim organizations in the Asia-Pacific region based on whether they had specific anti-fraud controls in place. The presence of several controls was associated with notable reductions in both losses and duration of fraud (see Figure 10). FIG. 10 How does the presence of an anti-fraud control relate to the median loss and duration of fraud in the Asia-Pacific region? R R R R R R R R R R R R 57% 33% 23% 33% LOWER LOSSES LOWER LOSSES 50% Management 33% 34% Dedicated fraud 17% LOWER LOSSES LOWER LOSSES 28% External audit of 38% 34% 17% LOWER LOSSES Hotline certification of financial statements internal controls over financial reporting FASTER DETECTION FASTER DETECTION FASTER DETECTION LOWER LOSSES Fraud training for employees department, function, or team Formal fraud risk assessments FASTER DETECTION FASTER DETECTION FASTER DETECTION 12 Victim Organizations Report to the Nations: Asia-Pacific Edition

13 FIG. 11 What are the primary internal control weaknesses that contribute to occupational fraud in the Asia-Pacific region? Lack of internal controls 25% Override of existing internal controls 21% Poor tone at the top 20% Lack of management review 13% Lack of employee fraud education 3% Lack of clear lines of authority 2% Lack of competent personnel in oversight roles 8% Other 6% Lack of independent checks/audits 2% Victim Organizations Report to the Nations: Asia-Pacific Edition 13

14 PERPETRATORS PROFILE OF A FRAUD PERPETRATOR Understanding the common characteristics of fraud offenders can help organizations improve their ability to detect fraud and minimize their risk of loss. The following information is based on the perpetrators in our study of the Asia-Pacific region. PER CENT OF C A S E S MEDIAN LOSS How does the perpetrator s level of authority relate to occupational fraud? 30% 41% 26% Employee Manager Owner/executive $58,000 $323,000 Where did perpetrators work within their organizations? These were the five most common departments: Operations 16% OF CASES Sales 16% OF CASES Accounting 8% OF CASES Finance 8% OF CASES Executive/upper management 11% OF CASES $1,000,000 Median age for all fraudsters in the region was Losses caused by fraudsters above the median age were much larger than losses caused by those below the median: 22 years old 66 years old Median loss: $100,000 Median loss: $400,000 Younger than 42 older than Perpetrators Report to the Nations: Asia-Pacific Edition

15 73% OF FRAUDS were COMMITTED BY MEN $300,000 MEDIAN MEDIAN LOSS $200,000 LOSS Losses caused by men were 50% larger than losses caused by women 44% of cases 56% of cases MEDIAN LOSSES WERE FAR GREATER WHEN FRAUDSTERS COLLUDED ONE PERPETRATOR $115,000 TWO OR MORE PERPETRATORS $400,000 Median loss Median loss FRAUDSTERS WHO HAD BEEN WITH THEIR ORGANIZATIONS FOR MORE THAN FIVE YEARS STOLE FOUR TIMES AS MUCH MORE THAN 5 YEARS TENURE $400,000 MEDIAN LOSS 5 YEARS' TENURE OR LESS $100,000 MEDIAN LOSS In 81% of cases fraudsters displayed at least one behavioral red flag. The five most common red flags were: 13% 13% 17% 25% 43% Living beyond means Unusually close association with vendor/customer Financial difficulties Control issues, unwillingness to share duties Wheeler-dealer attitude Only 5% OF PERPETRATORS HAD A PRIOR FRAUD CONVICTION Perpetrators Report to the Nations: Asia-Pacific Edition 15

16 CASE RESULTS We also asked respondents what actions the victim organizations took against the perpetrators after the frauds had been detected. Figure 12 shows that 79% of perpetrators in the Asia-Pacific region were either terminated or permitted or required to resign. However, some perpetrators remained at the organization, with 15% receiving probation, suspension, or no punishment. FIG. 12 How do victim organizations punish fraud perpetrators in the Asia-Pacific region? Termination 68% Settlement agreement 11% Permitted or required resignation 11% Probation or suspension 10% Perpetrator was no longer with organization 10% No punishment 5% Other 4% 16 Case Results Report to the Nations: Asia-Pacific Edition

17 LITIGATION AND RECOVERY OF LOSSES Victims might refer cases to prosecution or commence civil litigation to recover their losses. Our data indicates that while criminal cases in the Asia-Pacific region typically result in a conviction, civil suits and other attempts to recover losses are often unsuccessful. 51% of cases were referred for criminal prosecution 45% pleaded guilty 39% were convicted at trial 9% were acquitted or not prosecuted 28% of cases resulted in a civil suit against the fraudster 33% 48% judgment for perpetrator 14% judgment for victim settled After a fraud has been detected, the victim might try to recover its losses from the fraudster or other sources. Our data shows that victims are rarely made whole. 54% Recovered NOTHING 15% Recovered ALL LOSSES 31% MaDe a Partial Recovery Case Results Report to the Nations: Asia-Pacific Edition 17

18 METHODOLOGY The 2018 Report to the Nations is based on the results of the 2017 Global Fraud Survey, an online survey opened to 41,573 Certified Fraud Examiners (CFEs) from July 2017 to October As part of the survey, respondents were asked to provide a narrative description of the single largest fraud case they had investigated since January Respondents were then presented with 76 questions to answer regarding the particular details of the fraud case, including information about the perpetrator, the victim organization, and the methods of fraud employed, as well as fraud trends in general. (Respondents were not asked to identify the perpetrator or the victim.) Additionally, after completing the survey the first time, respondents were provided the option to submit information about a second case that they investigated. Cases submitted were required to meet the following four criteria: 1. The case must have involved occupational fraud (defined as fraud committed by a person against the organization for which he or she works). 2. The investigation must have occurred between January 2016 and the time of survey participation. 3. The investigation must have been complete at the time of survey participation. We received 7,232 total responses to the survey, 2,690 of which were usable for purposes of our global study. Of these usable responses, 220 involved occupational fraud cases perpetrated against organizations in the Asia-Pacific region; the data contained in this report is based solely on the information provided in these 220 responses. Analysis Methodology In calculating the percentages discussed throughout this report, we used the total number of complete and relevant responses for the question(s) being analyzed. Specifically, we excluded any blank responses or instances where the participant indicated that he or she did not know the answer to a question. Consequently, the total number of cases included in each analysis varies. In addition, several survey questions allowed participants to select more than one answer. Therefore, the sum of percentages in many figures throughout the report exceeds 100%. The sum of percentages in other figures might not be exactly 100% (i.e., it might be 99% or 101%) due to rounding of individual category data. 4. The respondent must have been reasonably sure the perpetrator(s) was (were) identified. 18 Methodology Report to the Nations: Asia-Pacific Edition

19 Unless otherwise indicated, all loss amounts discussed throughout the report are calculated using median loss rather than mean, or average, loss. Average losses were skewed by a limited number of very high-dollar frauds. Using median loss provides a more conservative and we believe more accurate picture of the typical impact of occupational fraud schemes. Additionally, we excluded median loss calculations for categories for which there were fewer than ten responses. Because the direct losses caused by financial statement frauds are typically spread among numerous stakeholders, obtaining an accurate estimate for this amount is extremely difficult. Consequently, for schemes involving financial statement fraud, we asked survey participants to provide the gross amount of the financial statement misstatement (over- or under-statement) involved in the scheme. All losses reported for financial statement frauds throughout this report are based on those reported amounts involved in the scheme. All losses reported for financial statement frauds throughout this report are based on those reported amounts. Methodology Report to the Nations: Asia-Pacific Edition 19

20 ABOUT THE ACFE Founded in 1988 by Dr. Joseph T. Wells, CFE, CPA, the Association of Certified Fraud Examiners (ACFE) is the world s largest anti-fraud organization and premier provider of anti-fraud training and education. Together with nearly 85,000 members in more than 180 countries, the ACFE is reducing business fraud worldwide and providing the training and resources needed to fight fraud more effectively. The ACFE provides educational tools and practical solutions for anti-fraud professionals through events, education, publications, networking, and educational tools for colleges and universities. Certified Fraud Examiners The ACFE offers its members the opportunity for professional certification with the Certified Fraud Examiner (CFE) credential. The CFE is preferred by businesses and government entities around the world, and indicates expertise in fraud prevention and detection. CFEs are anti-fraud experts who have demonstrated knowledge in four critical areas: Financial Transactions and Fraud Schemes, Law, Investigation, and Fraud Prevention and Deterrence. Membership Members of the ACFE include accountants, internal auditors, fraud investigators, law enforcement officers, lawyers, business leaders, risk/compliance professionals, and educators, all of whom have access to expert training, educational tools, and resources. Whether their career is focused exclusively on preventing and detecting fraudulent activities or they just want to learn more about fraud, the ACFE provides the essential tools and resources necessary for anti-fraud professionals to accomplish their objectives. To learn more, visit ACFE.com or call (800) / +1 (512) Contact Association of Certified Fraud Examiners Global Headquarters 716 West Ave Austin, TX USA Phone: (800) / +1 (512) ACFE.com info@acfe.com 20 About the ACFE Report to the Nations: Asia-Pacific Edition

21 Terms of Use The Report to the Nations and any accompanying charts, graphs, PowerPoint slides, or related content (collectively the Materials ) are available for use free of charge as a public service of the ACFE. You may download, copy and/or distribute the Materials for personal or business use on the following conditions: 1. No portion of the Materials may be sold or otherwise licensed, shared or transferred to any party for a fee, or included in any work that is to be sold, licensed, shared or transferred to any party for a fee, without the express written consent of the ACFE. The foregoing notwithstanding, you are permitted to use the materials as part of a speech or presentation for which an admission fee is charged. 2. The Materials must be properly attributed to the ACFE, including the name of the publication. An example of proper attribution is: 2018 Report to the Nations. Copyright 2018 by the Association of Certified Fraud Examiners, Inc Association of Certified Fraud Examiners, Inc. ACFE, the ACFE Seal, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. ( ACFE ) and registered in China, Singapore, and Japan. These marks, along with Association of Certified Fraud Examiners, CFE, Certified Fraud Examiner, Report to the Nations and other related trademarks, names and logos are the property of the Association of Certified Fraud Examiners, Inc., and are registered and/or used in the U.S. and countries around the world. About the ACFE Report to the Nations: Asia-Pacific Edition 21

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